Frasers Commercial Trust - RHB Invest 2019-04-24: Slow Leasing Progress At Alexandra Technopark

FRASERS COMMERCIAL TRUST (SGX:ND8U)

Frasers Commercial Trust - Slow Leasing Progress At Alexandra Technopark

Maintain NEUTRAL, with unchanged Target Price of SGD1.50, 1% upside. FRASERS COMMERCIAL TRUST (SGX:ND8U)'s 2QFY19 (Sep) DPU met expectations.
We remain NEUTRAL pending more visibility on Alexandra Technopark leases (where occupancy has been sub-optimal) and redeployment of divestment proceeds.
DPU in the meantime is expected to maintain stable, aided by higher capital distribution and payment of management fees in units.
Key catalyst would be strong occupancy improvement at Alexandra Technopark, and accretive acquisitions. Key risks are a slowdown in office leasing momentum and forex fluctuations.

Frasers Commercial Trust's 2QFY19 revenue and NPI were lower 11% and 15% y-o-y, impacted mainly by lower occupancy at Alexandra Technopark (ATP), divestment of 55 Market Street (55MS), and the weaker AUD.
Impact to DPU was however mitigated by higher JV contribution, increased capital distribution of SGD4.9m (2QFY18: SGD2.9m), and 100% of management fee paid in units. We expect higher capital distributions to offset the loss of income from divestments and lower portfolio occupancies for the next few quarters.
Management guided that it still has about SGD159m of divestment gains from the disposal of hotel development rights and the sale of 55MS.

Occupancy at Alexandra Technopark has bottomed at 59.2%, with the exit of anchor tenants, Hewlett-Packard Enterprise Singapore Pte Ltd and Hewlett-Packard Singapore. Take-up rate for the office space has been fairly slow in our view despite the reasonably healthy demand for Grade-B office space. Management said that this is partly due to the fact that it has been holding up asking rents at around SGD4psf.
The Business Times had earlier indicated that Google has been in talks to take up about 400,000 sqf of space at average rentals of SGD4psf. Management noted that it has been in discussions with a few large and smaller tenants for the vacant space, but nothing has been firmed up yet.
We also note that there would be a likely fit-out period of 3-6 months after the signing of the lease during which there would be no income contribution resulting in lower near-term income from the asset. As Alexandra Technopark is the largest income contributing asset in its portfolio, any strong occupancy improvement should be a key rerating catalyst in our view.

Frasers Commercial Trust’s gearing of 29.1% is one among the lowest among S-REITs, presenting a good debt headroom of c.SGD350m (assuming 40% levels) for acquisitions. We believe it may potentially look at acquiring the remaining 50% stake in the Farnborough Business Park (FBP), and look at other sponsor assets in UK once the Brexit uncertainty is cleared, due to its attractive yields and long WALE.
When queried on the possible acquisition of Frasers Tower (sponsor asset), management guided that it is currently not looking at the asset and believes that current yields are not attractive enough to do an accretive acquisition.

Central Park will undergo a SGD23m (FCOT’s 50% share: SGD 11.5m) asset enhancement initiative (AEI) to upgrade lobby and forecourt areas. The is mainly to enhance the buildings competitiveness (no GFA improvements) and will be carried out in a way that there is minimal disruption to occupancy. Works are expected to commence in 2Q19 and expected to be completed by 3Q20.

China Square Central’s (CSC), SGD38m AEI works are on track to be completed by 2H19, which should see 17% uplift to malls’ NLA. Pre-commitments currently stand at c.50% (40% as of last quarter), with average rents expected to be in high single digits.
The 304-room Capri by Fraser, CSC is also expected commence operations in 2Q19 and bring more vibrancy to the area and benefit retail tenants.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-04-24

SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.500 SAME 1.500